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Welcome to

FINM7401 Finance

Agenda
Information about the course
Seminar one: introduction to financial
management and ethics in Finance
Maths review (optional)

Welcome to the course &


UQ
Some things you need to know:
About the course
Resources
Course structure
Assessment
Contacting staf
Tips for success in FINM 7401
What do we do in the seminars?
What do we do in the tutorials?

About the course


The objective of this course is to provide
an introduction to financial management:
How do businesses make their investment
and financing decisions.
Specifically, how do businesses decide
what to invest in and where do they get
the money for these investments.

About the course


If you do further courses in finance, you
will look at the areas we cover in this
course in much more detail.
That is why this course is a pre-requisite
for other finance courses. You must know
the material in this course well to
successfully proceed.

Resources
Required:
Essentials of Corporate Finance, Ross
et al. (3rd edition)
A calculator: bring to classes,
tutorials, and exams from Week 2
(see course profile section 5.4 for
calculator policy)
References (optional):
Business Finance, Peirson et al.
Principles of Corporate Finance,
Brealey et al.

Resources: Textbook
Essentials of Corporate
Finance 3rd edition
Ross| Trayler| Bird | Westerfield
Jordan
www.mcgrawhillconnect.com

Resources: Textbook
A number of options for the textbook

Print text only


Print Text + Connect

Includes everything within Connect without


the eBook
Connect Plus $89.05 + GST
All digital, includes the eBook and access to
Connect
***Note that the eBook is only available for
12 months from purchase
Connect (9781743072400) - $27.23 + GST
Includes everything within Connect without

Connect is an e-learning platform provided

by the publisher of the textbook which gives


students access to
some clips explaining the concepts we
will discuss in the course
a simulation platform to give students
experience with trading financial assets
a few questions (10-20) for each chapter
covered in the course.
It is not compulsory for students to
purchase access to Connect - this is an
optional extra resource if you want it.

Course Structure
(see course profile)
Seminar: One 3-hour seminar per week
Theory development with practical
applications including case studies
It is best if you can scan over the materials
before the seminar
Seminar notes are available on Blackboard
Lecturers:
Elizabeth: Week 1-7 (27 July to 20 September);
Week 11-12 (19 October to 1 November); and,
Darren: Week 8-10 (21 September- 18
October).

Course Structure
Tutorials - start in week 2
Tutorials lag the seminars by 1 week; e.g. the
tutorial for seminar 1s work is held in week 2.
One 1-hour tutorial per week
Tutorial times and venues on my SI-net
Sign on for tutorial class
Contact Fox Gao: f.gao@business.uq.edu.au
about any sign-on problems

Prepare tutorial problems posted on BB


Solutions to tutorial questions will be made
available at the end of each week

Please bring calculators to seminars and


tutorials

Assessment
Mid-semester exam
20%
Held on a Saturday:
TBA either 5th, 12th, 19th September.
Details will be put on BB when known.
Individual Assignment
25%
Due 9am Monday 12 Oct

Final Exam

55%

Assessment
You should look on BB and at the course profile
with regard to missed exams. The process is
very clear, structured, and final.
For your exams you will need pencils (to fill out
the m/c answer sheet) AND pens AND your
calculator (know the calculator policy section
5.4 of the course profile)more on this as they
approach.
Your assignment contains three parts. You will
need to complete an online tutorial (Part 1),
submit two documents for Part 2 and 3 online.

Contacting Staf
See BB for contact details of staf including
consultation times. (Any changes to will be
announced via BB)
You do not need an appointment to see staf
during their consultation times just go to
their office.
IMPORTANT: Teaching staf are more than
happy to assist that is their job.
If you are having problems, see us in our
consultation times (you can see any member
of staf). But we do not do the work for you. If
you show us you have made an efort and can
discuss your problems with us we will help.

Contacting Staf
Do your work weekly and see us if you have
questions. Do not wait for the days before
the exam to ask about materials from week
1.
BB has a discussion forum feel free to post
questions and answer other students
questions
Staf will answer questions on BB regularly.
Remember: we are here to help you but
your learning remains your responsibility.

Tips for Success in


FINM7401
Read the course profile carefully
Prepare tutorial questions before the tutorial
Be sure to study theory (written) as well as
practical (numerical) problems both will be
examined
The case studies are examinable and will
require you to critically evaluate, develop
recommendations with justifications.
The course is progressive (dont fall behind)

Tips for Success in FINM


7401
Come to lectures having gone though the
lecture readings.
Bring your calculators & be prepared to
do the work in the lecture.
Attend tutorials having attempted the
work FIRST.
You will not learn if you simply attend
tutorials and attempt to copy down the
answers.
See your tutor promptly if youre having
difficulties.

What do we do in the seminars?

Each seminar will clearly state the


objectives for that week. Use these as a
guide when you study. Ask yourself can
you meet the objectives?
Why are they called seminars and not
lectures? A lecture suggests lecturers do
all the work stand in front of you and
lecture. Wrong. All finance courses will
require you to be involved, ofer input and
do work. We will assist by guiding your
learning and creating an active learning
environment. Ultimately though, your

What do we do in the seminars?

To finish of most of the seminars, we have


set some exercises for you to work on in
the seminar. This is to practice what we
have just discussed.
Make your best attempt at these and then
your lecturer will work through them.
Answers will also be posted on BB at the
end of the seminar week.

What do we do in the
seminars?
Dont just sit there in the seminar
confusedIf you dont understand,
askwe are happy to repeat and
explain. It is not disrespectful to ask
question to us.
If you have a diferent opinion tell
uswe respect your opinions.

What do we do in the
tutorials?

At the end of each seminar, you


then need to go away and review
the materials to be able to meet
the seminars objectives.
At the end of each chapter there
are many questions and problems.
Each week the questions you
need to do for tutorials will be
posted on BB make sure you
check BB regularly

What do we do in the
tutorials?

The tutorial will go through the


solutions. This is your chance to
get help with the ones you had
trouble with.
For tutorials to be of value: make
a good attempt at the questions
and problems BEFORE attending.
You wont learn if you just sit
there.

What do we do in the
tutorials?
Solutions will be posted on BB at the end
of the relevant week.
For students wanting extra to work on
there will also be some additional
questions & problems. These will not be
covered in the tutorials.
Solutions will be also be provided to these
on BB.
Solutions will NOT be provided for those
questions & problems that have not been
set.

A note on mathematics
Some students may need or want to do
some relevant math revision to assist them
throughout the course.
This may better ensure you have some of
the basic skills required for Finance.
Besides the brief mathematics review in
Seminar 1, we also recommend making use
of the library resource (i.e., Maths Revision
of Interactive Finance, the information
about the resource is available on BB).

A note on writing
Postgraduate workshops held by Business School
(New! Highly recommended)
Presentation Skills
Sunday, 9 August 2015 - 9.00am - 12.30pm OR;
Saturday, 15 August 2015 - 1.00pm - 4.30pm

Writing Skills
Sunday, 9 August 2015 - 1.00pm - 4.30pm OR;
Saturday, 15 August 2015 - 9.00am - 12.30pm

All workshops will be held in the Prentice Building


#42, Room 216, St Lucia Campus
*Light refreshments will be provided between 12.30pm1.00pm each day

A note on writing
Some writing guides on individual
assignment is provided- available on
BB
UQ writing workshops are available
at: http://www.uq.edu.au/studentservices/learning/workshops

FINM 7401 Finance


Seminar 1
Introduction to financial
management
Ethics in finance
Readings: Chapter 1, Ross et al.

Learning objectives
What is finance?
Discuss the basic types of financial
management decisions; and the role of a
financial manager.
Identify the goal of financial management.
Compare the financial implications of the
diferent forms of business organisation.
Describe the conflicts of interest that can
arise between managers and owners.
Discuss the role ethics has to play in
finance.

What is Finance?
Every business is a process of
acquiring and disposing assets: real
assets and financial assets.
Finance is a science of valuation and
management of assets.
The field of finance deals with the
concepts of time, money, risk and
how they are interrelated.

Key Valuation Ideas


Valuing Financial Assets
We can use the three key ideas in finance to
consider the value of financial instruments and
how it is measured, namely:
The Time Value of Money;
Diversification; and,
Arbitrage.

Key Valuation Ideas


The Time Value of Money
In studying the time value of money, we will
see it forms the basis for all asset valuations.
In this course, we will study the following
aspects of the time value of money:
Time Value of Money

Financial
Mathematics

Valuing
Stocks

Valuing
Bonds

Making
Investment
Decisions

Key Valuation Ideas


Diversification
Financial market participants want to make as
much money as possible with the least risk. To
reduce risk, market participants can diversify. If
everyone diversifies, this tells us something
about how assets are priced: It tells us the return
required for a given level of risk.
Diversification

Defining Risk and


Understanding its Relationship
With Return

Portfolio Theory

The Capital Asset Pricing Model


(CAPM) and the Required Rate
of Return for Risk

Why study FINM7401?


Majors in finance
The first course you will take of a suite of
finance courses
Later finance courses build on what you learn in
this course

Majors in accounting
Accountant may have a dual accounting and
finance function
Need to understand financial products to know
how to account for them
Accounting and finance are very closely related

Why study FINM7401?


Majors in Marketing
Need to understand how to value/budget for new
projects
Analysing costs/benefits of new projects

Majors in Management
Impossible to set strategy without understanding
financial implications

You personally
Personal investments
Day-to-day cash flow management
Retirement planning

The four basic areas of finance


Finance is broad term, but the
discipline can be divided into a
number of sub components:
Investments
Financial institutions
International finance
Corporate/business finance (these two
names are used interchangeably)
what this course is about

Investments
Working with financial assets such as
shares and bonds
Value of financial assets
Risk versus return and asset
allocation
Job opportunities
Stockbroker
Financial advisor
Portfolio manager
Security analyst

Financial institutions
Companies that specialise in financial
matters
Banks including investment banks,
commercial banks, credit unions and
building societies
Insurance companies
Brokerage firms

Job opportunities
Client advisor
Credit analyst

International finance
An area of specialisation within one of
the areas discussed so far.
Need to be familiar with the particular
issues that working internationally
requires e.g. exchange rates and
political risk.
May allow you to work in other countries
or at least travel on a regular basis.

Business/corporate finance
What do businesses invest in?
machinery, buildings, equipment, takeovers (of
other businesses)

How do businesses finance these


investments?
Business can raise external funds in two ways.
What are these?

What are examples of these?

Forms of business
organisation
Business can take one of three major
forms in Australia:
1. Sole proprietorship
2. Partnership
General
Limited

3. Corporation (limited companies)


In this course we will concentrate on large
companies. But most of the theories we
consider apply across the spectrum of
businesses sizes.

Sole proprietorship
Business owned by one person
Advantages

Disadvantages

Easiest to start
Least regulated
Single owner
keeps all the
profits
Taxed once as
personal income

Limited to life of
owner
Equity capital
limited to
owners personal
wealth
Unlimited
liability
Difficult to sell
ownership

Partnership
Business owned by two or more persons

Corporation
A legal person distinct from owners

Corporate decision making


In a large public listed company (do
you know what a publically listed
company is?), who is responsible for
making the investment and financing
decisions?
Typically a financial manager called a
CFO (Chief Financial Officer).

Note: the exact titles and organisation can difer from company to
company.

Corporate decision making


Youtube: role of CFO
EXTRA: what are the 3 priorities of
finance identified by the CFO in the
video?

Corporate decision making


Review to date:
We know now what the business should be
trying to achieve. And we know the role of
the financial manager is to make
investment & financing decisions that lead
to this objective.

This course (FINM7401) is about


developing the models and valuation
techniques that allow businesses to do
this.

Corporate decision making

We can broadly classify decisions to do with financial


management into the following categories:
Capital budgeting
The process of planning and managing a firms longterm investments
What long-term investments or projects should the
business take on?
Capital structure
How should we pay for our assets?
Should we use debt or equity and in what
proportions?
Working capital management
How do we manage the day-to-day finances of the
firm the short-term assets and liabilities?

Corporate decision making


As a CFO, when we make the
investment and financing decisions,
what are we trying to achieve?
That is, what is the objective?

This is important, as an objective is


something we can measure and hence
determine whether it has been
successful or not.

Goal of financial
management
What should be the goal of a corporation?

Maximise profit?
Minimise costs?
Maximise market share?
Maximise the current value per share of the
companys existing shares?
Maximise the market value of the existing
owners equity?

Look back at the company structure slide.


Who is above the board of directors?

Goal of financial
management
Why do shareholders buy shares?
To gain financially from an increase in share
value & receiving dividends

Therefore, decisions need to be made


to help shareholders achieve this
objective.
The goal of financial management is:
maximise the market value for the
existing owners equity
For a publicly listed firms, this could be
stated as: maximise the current
value of existing shares

Goal of financial
management
Can you see a problem with the
objective especially for publicly
listed firms?
Who owns the firm?
Who manages (runs/controls what
happens in the firm day to day) the
firm?

This is what we call the separation


of ownership and control

Goal of financial
management
Managers are agents for the companys
owners (shareholders) this means that
they are supposed to run the firm in the
best interests of the shareholders, not their
own best interests.
Can you think of a goal that managers
might have that difers from the owners?
This problem is called the agency problem
A number of mechanisms are used to
minimize agency problems

Do managers act in the


shareholders interests?
Managerial compensation
Incentives can be used to align
management and shareholder
interests.
The incentives need to be structured
carefully to make sure that they
achieve their goals.

Corporate control
The threat of a takeover may result in
better management.

Other stakeholders: has a claim on

Example: Work the web


The internet provides a wealth of
information about individual companies.
http://au.finance.yahoo.com/ is good
website for company information; also,
http://www.asx.com.au /
Company examples
Flight Centre (FLT)
AGL Energy (AGK)
CSL (CSL)
Woolworth (WOW)

Financial markets and the


corporation
Self study (assessable): read pages 1618 of the textbook carefully and make
sure you understand the following:

Primary vs secondary markets


Dealer vs auction markets
Trading in corporate securities
Listing

There will be some questions in the


tutorials on these topics

Ethics in Finance
Ethics is a tough one! How do we
define what ethics are? Is it about
what is right & wrong?
Think about that in a business setting.
In the context of todays materials,
think in terms of management acting
in shareholders interests.
Note that most business professional
bodies (CPA, CA, CFA) have specific
codes of conduct that cover how
members must behave in specific
situations

Ethics in Finance
However, our objective in this
course is to have you think for
yourself about this important issue
We are simply introducing you to
the idea
YOU NEED TO THINK FOR
YOURSELF

Ethics in Finance
In the shower tonight ask yourself some
of the big questions:
What are ethics to you? What is
unethical behaviour?
Why is it an important issue in
finance?
How would you deal with various
situations?
If I asked you in a job interview, what do
you think about ethics in finance, I
would expect you to be able to put
together an answer!
Lets get you thinking by considering a
number of scenarios via case studies.

Case Studies
Cases:
During the semester we will make use of a number
of cases. UQ Business School has access to the
Harvard Business School case studies. (Usually
you will be told in advance to print these out and
bring them to the seminar. For this week only we
will supply these.)
The cases give a real world application of the work
we have studied in the seminars. Your exams may
contain questions/problems concerning the cases.
The questions/problems will be about the major
issues, lessons learned, your opinions.

Case Studies
Cases:
The objective of using the cases is to help you
develop real life solutions and to formulate your
OWN opinions which you can justify/support
with explanations.
Detailed solutions to the cases ARE NOT
PUBLISHED ON BB. They are only discussed in
the seminars. This is partly to do with the
licence arrangement with Harvard and also with
the expectation that you attend and participate
and develop your own answer, not just what the
lecturers or fellow students might think.

Case Studies
at another time read: Corporate
ethics; page 11 of text.
now: Case Study time

Tutorial work
1.11.6, 1.10, 1.12, 1.14, pages 19
20.
The Ozzie Cake Company, page 21.
For your own study: make sure you
fully develop answers to the Harvard
case from the seminar.

Mathematics review
mathematical formulas
Manipulating

e.g., solve the equation:


Exponential functions

2 to the power of 5; the value of the


power is 5, called exponent and the
number that is multiplied together is 2,
which is called the base.

Mathematics review
When

multiplying exponential
functions with the same base, we
add the exponents:
When the power is negative, we take
the reciprocal

Mathematics review
When

the power is a fraction, the


denominator of the fraction is taken
as the root.
Solving equations that involve
exponential functions

Mathematics review
Logarithmic functions
Rule 1: the log of a times b is equal to
the log of a plus the log of b:

Rule 2: the log of a divided by b is


equal to the log of a minus the log of
b:

Mathematics review
Rule

3: the log of a raised to the


power c is equal to c times the log of
a:
e.g., =2.772
Solve the equation:
Take log: